Tracking trends in venture capital and private equity

ATB’s M&A Advisory Services group recently attended the Canadian Venture Capital and Private Equity Association’s (CVCA) annual conference. The interest in this Canadian conference was the best ever, with over 630 delegates attending. As one would expect, most are Canadian delegates. However, private equity representatives from the UAE, Luxemburg, China and the US were also there.

The CVCA started in 1974 and today its membership has reached an all-time high, with over 200 corporate and 1,000 individual members. On the first day of the conference, I joined Mike Wollatt, CVCA’s Chief Executive Officer, for breakfast. He commented that the membership increase over the past year was being largely driven by the uptick in venture capital (VC) activity. In fact, 30 per cent of CVCA’s members today are VC firms, outnumbering private equity (PE) firms (23 per cent) for the first time.

As with any conference, networking is a primary reason for attending. The CVCA complemented this with a formal agenda packed with keynote addresses, workshops and panel presentations. While it was not physically possible to attend each session, below are highlights and takeaways from this year’s conference.

Venture capital (VC) – investment activity

Q1 2016 saw VCs invest $838M in 118 Canadian ventures. Of the 118 deals, 47 were in Ontario ($486M), 26 in Quebec ($54M) and 19 in British Columbia ($207M) while Alberta ($7M) and Nova Scotia ($5M) attracted capital for five deals each.

The VC market appears to be making a comeback, with a total of $2.3B invested in Canadian companies in 2015, the highest level of investment recorded since 2002. This increase in activity is largely driven by small groups dedicated to supporting Canadian technology and healthcare companies as well as federal government initiatives through the Venture Capital Action Plan (VCAP).

While excited for the recent activity, the overall tone of Canadian VCs is cautious with further caution advised based on a US/Canada population ratio of 10:1 and the total VC market in the US is thirty times that of Canada. Mike Serbinis, CEO and founder of League Inc. and successful builder of several tech companies (Kobo, docSpace), pointed out that US VCs are not really interested in making investments in Canadian companies. He also highlighted that as larger, add-on financing rounds are required most Canadian VCs do not have the ability to write big cheques.

Private equity (PE) – investment activity

Q1 2016 saw PE firms invest $3B in 85 Canadian deals. Of the 85 deals, 50 were in Quebec ($1B), 16 in Ontario ($673M) and 10 in British Columbia ($145M). Alberta ($1B) was in 4th place at six deals.

Canadian PE deal value and deal volume peaked to all-time highs in 2015. $23B was invested in 424 completed deals. This exuberance was largely attributed to a weakened Canadian dollar and an influx of foreign PE (largely US) and strategic buyers. In fact, nearly one-half of all PE deals done in Canada last year were completed by foreign buyers. For some public issuers unable to access the capital markets, private equity was a suitable alternative to further fund growth.

Private equity and debt

A five person panel with representatives from HSBC, Manulife, BMO, Apollo and Goldman Sachs provided insight into “Current Trends and Solutions in Today’s Debt Environment”. They referred to a 2015 “Americanization” theme with the following flow:

US investments for PE firms over the last several years became highly competitive;

The competition for Canadian deals led to an increase in EV/EBITDA multiples, which averaged 10.5x EV/EBITDA in Q1 2016 for mid-market deals between $10M - $50M in EBITDA (information source not provided); and

The panel attributed the higher valuations directly to the ability to access cheap debt.

What’s next for PE activity in Canada?

Tony James, President and COO of Blackstone Capital, specifically commented that Canada was “not a prime market” for them. They do have an interest in oil and gas (and see the next five years as an excellent time for investor returns) but believe US E&P opportunities have the transportation advantage relative to Canadian producers. It appears that given Blackstone’s size ($344B assets under management), it now only considers very large deals outside of North America. Canadian opportunities are too small.

Overall, the tone was that PE firms have access to an abundance of additional capital. When combined with the debt panel’s view that the cost and availability of debt will remain abundant, one can expect ongoing PE activity in Canada, either directly from Canadian firms or those in the US prepared to more aggressively add leverage to win a deal.

From various presentations at the conference, it is unclear the exact definition of “mid-market”. Overall, reference was often made to mid-market transactions as those involving companies with annual EBITDA of $10M to $50M. We cannot assume that PE is not interested in opportunities with EBITDA less than $10M. However, we can assume that the investment interest increases somewhat linearly as EBITDA goes from $10M up to $50M.